Achieving shareholder value in the face of intensifying industrial competition is a constant challenge. With increasing globalisation and economic liberalisation, local industry has to rethink the way it does business in order to survive and evolve in the face of international competition.
One of the most enduring models used to quantify value comes from the chemical giant Du Pont, outlined in 1919. The model assesses data such as sales, cost of the sales process, fixed assets and current assets to evaluate return on equity, forming a simple framework with which to analyse the root cause of insufficient value creation. The model demonstrates that there are only two ways to increase return on investment (ROI): by increasing sales - either by increasing the price per unit or selling more units, or by decreasing loss of sales, fixed assets and current assets.
In asset-intensive environments such as the manufacturing, mining, utilities and facilities industries, the Du Pont model finds particular significance.
Across all industries the driver of sales is production, provided that the market is not saturated. Increasing the selling price is usually not feasible in a tough market. Production requires equipment, whether a machine on a factory floor, a crane in the harbour or a bus transporting people. Keeping these assets operating at optimal lifecycle cost and availability is the key to increasing this variable. Even in instances where the market cannot absorb more product, increasing the efficiency of a particular asset can create the opportunity to sell another that becomes redundant. Keeping a physical asset running effectively is the best way to improve shareholder value.
Meticulous measurement of performance is critical for progress.
Adriaan Scheeres, CEO of PRAGMA Holdings
Meticulous measurement of performance is critical for progress. Measurement enables the setting of benchmarks and the identification of the root causes of performance failure. In the continuous manufacturing environment this involves knowing when production lines are standing or operating below capacity, and the reasons why. It also means knowing what percentage of product is being produced within the required quality standards.
The de facto standard for performance measurement within the continuous manufacturing environment is overall equipment effectiveness (OEE). OEEs are calculated by measuring availability, production rate and quality rate. These three percentages are multiplied to produce the OEE measure. While it is theoretically possible to keep track of OEEs manually, the reality is that unless an automated system is employed, the quality of the results is often not worth the effort.
Not every aspect of production can, however, be automated as certain downtime reasons cannot be measured using sensors. For such instances the system should allow for operator intervention. A sound automated performance system will capture reasons for downtime using operator input via a touch-screen that provides a list of predefined downtime reasons. Operations cannot resume without the provision of required information. A time threshold will, however, be set so that minor stoppages can still occur.
Simply measuring and capturing information is, however, not enough. In today`s competitive environment where flexibility is a non-negotiable, decisions need to be made as problems occur. There is no time to wait for weekly or monthly planning meetings to chart a course of corrective action. Information should be available in real-time over the Internet so that immediate access is possible from anywhere in the world. Management should be able to observe exactly what is occurring on the floor of a factory on the other side of the globe as it happens.
Operating expenses are also significantly influenced by effective asset management. Maintenance costs can constitute as much as 40% of operating expenses. This presents a huge opportunity for improvement, as shaving off even a few percent can have considerable consequences for the bottom line.
Most industries still find themselves in reactive mode - fixing equipment once it breaks down. Besides the obvious cost of lost production time, this haphazard approach also ends up pushing up maintenance expenses. A planned maintenance approach that focuses on prevention rather than cure is crucial. Not only does this present a structured process for issuing reactive and proactive maintenance jobs, but it also ensures the appropriate spares and human resources are available when needed, keeps accurate records of work conducted and notes reasons for equipment failure. This approach saves money in the long term by saving time, eliminating safety stock of spares and human resources and providing the information needed to run a finely tuned operation.
Asset management also reduces cost of sales via waste reduction. When processes continually break down, waste is inevitable. Work in process might become unusable while poor quality at start up can create scrap. Properly operating equipment also reduces the percentage poor quality product that has to be either reworked or rejected.
Asset management can also create shareholder value by reducing fixed asset requirements. New capital expenditure can also be delayed by better maintaining existing equipment and reducing spares.
Current assets are also reduced through the limitation of inventory. Excess inventory is often kept to maintain production when equipment in the production process repeatedly breaks down. This inventory not only costs money, but it takes up valuable storage space and causes a cluttered, unsafe working environment. The more reliable the production process, the less the dependency on safety inventory.
Asset management impacts on every aspect of value determination. With the level of competition in the marketplace constantly increasing, asset management improvement represents an opportunity to break the stranglehold of escalating competition. Yet this is an often-neglected aspect of corporate management, partly because top management is so far removed from the shop floor that it underestimates the inherent value of the discipline.
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